Senate-Approved Mortgage Legislation Moves to the House

WASHINGTON -- The Foreclosure Prevention Act of 2008 was passed in the Senate on April 10 by a vote of 84-12 following discussions by Senators Chris Dodd (D-Conn.) and Richard Shelby (R-Ala.) on its provisions, resulting in a bipartisan effort to gain wide support.

The legislation aims to both streamline and expand the reach of the Federal Housing Administration by raising the limits on the size of loans the FHA can insure; provide counseling to Americans facing foreclosure; enhance mortgage disclosure requirements; provide $4 billion to state and local governments for the rehabilitation and resale of abandoned and foreclosed homes via the Community Development Block Grant Program; provide community development block grants to buy abandoned or foreclosed properties; allow tax-exempt bonds to refinance subprime loans; and provide a $7,000 tax credit for those who purchase homes in foreclosure. The bill also allows businesses that lose money in 2008 and 2009 to get refunds of taxes paid over the past four years, rather than just the past two years, which is the case under current law.

That provision is estimated to cost an estimated $6.1 billion over the next 10 years and is the single most costly provision in the bill, according to the nonpartisan Drum Major Institute for Public Policy. Drum Major issues annual scorecards analyzing the impact of domestic legislation on the middle class and evaluates members of Congress based on their votes on legislation. Its analysis, posted on its Web site (www.themiddleclass.org), was mixed on how effective the bill will be to stem foreclosures and restore a viable home buying market.

The bill allows for a new temporary tax deduction to enable homeowners who do not itemize federal income tax deductions to deduct state and local property taxes. Single filers could deduct a maximum $500 and joint filers could deduct $1,000. The new deduction would only be available to taxpayers who live in areas that do not raise their property tax rates and would cost the federal government an estimated $1.5 billion over 10 years, according to the Drum Major analysis.

Drum Major called the foreclosure crisis and the wider turmoil in credit markets the greatest threat to middle-class Americans today and said that the bill is "stuffed with costly and irrelevant provisions, while the positive steps it does include fail to go far enough to help struggling families."

"The single most effective measure proposed to address the crisis--a change in bankruptcy law that would prevent hundreds of thousands of foreclosures was killed in amendment," it added. That amendment, offered by Sen. Dick Durbin (D-Ill.), would have allowed bankruptcy judges to alter mortgage terms and was narrowly crafted after consultation with NAFCU and consumer groups.

Home builders and other businesses facing economic losses due to the downturn will reap $6.1 billion in tax breaks, according to Drum Major. "This provision has little to do with helping prevent foreclosure and is and is the single most costly provision in the bill," the analysis said.

It also found the property tax deduction for nonitemizers problematic. "While many middle-class families might see a small tax break under this provision, the credit is not substantial enough to help families who face foreclosure or are having serious difficulties making mortgage payments and is not targeted at these homeowners."

The deduction is limited to people who live in areas that have not raised property taxes, creating an incentive for states and municipalities to cut services that middle-class families rely on rather than raising the revenue needed to preserve them. And they fear the tax credit for buying a foreclosed home might actually encourage more home foreclosures. "Middle-class Americans will ultimately see some benefit from this bill--but they deserve better," Drum Major said.

A joint statement by the Center for Responsible Lending, ACORN, the AFL-CIO, Consumers Union and a dozen other civil rights, housing and consumer organizations echoed similar sentiments.

"The Senate Housing package misses the single most significant step needed to help the 20,000 American families with subprime loans that are losing their homes each week through foreclosure: the bankruptcy amendment. We are left with a bill loaded with special considerations for mortgage companies and builders that does very little for homeowners who were sold predatory loans by mortgage lenders.... We are encouraged that there is recognition that the bill under consideration by the U.S. Senate today is only part of the solution."

And John Taylor, president of the National Community Reinvestment Coalition commented that, "This is like putting antibiotic ointment on a broken arm, when what is needed is to set the bone and wrap it in plaster.... The bill offers minimal support for institutions working to assist borrowers, but fails to offer immediate and meaningful assistance that would help millions of homeowners."

All the Senate Democrats voted for the bill and many Republicans as well (See sidebar for list of Nay votes).

The bill to assist homeowners now moves to the House Ways & Means Committee for approval before moving on to the full House, said NAFCU Director of Legislative Affairs Brad Thaler. "Rep. Frank's bill will be marked up on April 23 or 24, and those two bills will be married on the floor," he said. The expectation is that the Senate and House version will go to a conference committee, where contents of the final package will be decided. Given the strong desire to pass some form of housing assistance, Thaler said, it was likely to happen by the end of the month or in early May. "I think Congress would like to have this done before it breaks for its Memorial Day recess."

It's possible that the Durbin amendment could be revived in conference, he said.